equity markets in devika
TRANSCRIPT
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ASUMMER TRAINING
REPORT
ON
RECENT GROWTH IN INDIAN EQUITY MARKET
Submitted for the Partial Fulfillment of the Degree in
MASTERS OF BUSINESS ADMINISTRATION
2009-2011
Supervised to: Submitted by:
MISS KIRTI SHARMA DEVIKA GIDWANI
Lecturer
M A N A G E M E N T & C O M M E R C E I N S T I T U T E O F G L O B A LS Y N E R G Y , A J M E R
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PREFACE
A stock market / share market is a public market (a loose network ofeconomic transactions not a physical facility or discrete entity) for the tradingof company stock and derivatives at an agreed price; these are securities listedon a stock exchange as well as those only traded privately.A market where investors buy and sell securities providing ownership of acompany's shares.The BSE Sensex or the BSE Sensitive Index is a value-weighted indexcomposed of 30 companies with April 1979 as the base year (100). Thesecompanies have the largest and most actively traded stocks and arerepresentative of various sectors, on the Exchange. They account for around
one-fifth of the market capitalization of the BSE. The Sensex is generallyregarded as the most popular and precise barometer of the Indian stockmarkets. Incorporated in 1992, the National Stock Exchange is one of thelargest and most advanced s tock markets in India. The NSE is the world'sthird largest stock exchange in terms of transactions. There are a total of 23stock exchanges in India, but the BSE and NSE comprise 83% of the volumes.The Securities and Exchange Board of India (SEBI), established in 1992,regulates the stock markets and other securities markets of the country Equityand corporate-debt markets open new sources of funding for businesses, cuttheir cost of capital, give savers new investment options, and are essential tofinancing pension programs. India's stock market already performs well.
The purpose of this project is to find out the Analysis of theoretical &Practical differences in Recent growth in Indian equity market. And
Theory & Organizational adoption of that theory. In this report there is manyaspects related to Indian equity market. There is also description about trading
system, listing, delisting, procedure of online trading, functions of SEBI,
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ACKNOWLEDGEMENT
For any successful work, it owes its thanks to many. Here I wish to extend my
gratitude to all those who helped me at various stages of this study.
I am thankful to Mr. AJEET AGARWAL, DIRECTOR, MITTAL SHARE
SHOPPE LTD. for providing me with the facilities and resources required to
carry on the project in this best possible manner.
I express my heartfelt thanks to Mr. VIJAY RANKA for his support & guidance
throughout the project study.
I express my sincerely thankful to Miss. KIRTI SHARMA, Who encourage me
to make this project.
I also express my sincere gratitude to my helping me throughout the project,
under whose guidance and counseling encouragement and constructive
suggestions given throughout the conduct of the study, left me confident.
Once again, I express my sincere thanks to project guide Mr. RAMANUJ
AGRAWAT for helping me understand the basic underlying a project study and
wholehearted gratitude to all those persons with whom I was associated and
whose benign help and guidance enabled me to complete the project work.
In the last, I would like to thank once again my project guide Mr. RAMANUJ
AGRAWAT that he obliged me by giving his precious time & guidance, added
great value in my knowledge and enhanced my skills.
Devika gidwani
M.B.A III SEM
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Executive Summary
SUMMER TRAINING REPORT ON RECENT GROWTH IN INDIAN
CAPITAL MARKET
NAME OF THE ORGANISATION - MITTAL SHARE SHOPPE
LTD
INCORPORATED ON - 2 MAY 1997
REGISTERED OFFICE:
MITTAL SHARE SHOPPE LTDPARSHWANATH COLONYANASAGAR CIRCULAR ROADAJMER-305004RAJASTHAN
PROMOTERS OF THE COMPANY:
MR. SUNIL KUMAR MITTAL
MR. MANOJ KUMAR MITTAL
DIRECTORS OF THE COMPANY:MR. SUNIL KUMAR MITTALMR. MANOJ KUMAR MITTALMR. AJEET AGARWAL
Introduction of the Company
Mittal Share Shoppe Ltd was incorporated on 2 may 1997 in Ajmer. MittalShare Shoppe deals in investment and finance sector.. It is the firstcompany to initiate share broking in Ajmer district of Rajasthan andcurrently handling more than 2000 clientele in Ajmer and nearby area. Ithas sub-broker ship of Share India Securities Ltd and FMS Securities Ltd.
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And presently associated MPSE Securities Limited (a 100% subsidiary ofMadhya Pradesh Stock Exchange).
Functioning of the Company
Mittal Share Shoppe Ltd is a registered sub-broker in stock market. Ithandles its clientele smartly at no-risk basis. It has its depositary in MGCapital Services, Share India Securities Ltd and MPSE Securities Ltd.There are nearly 20 employees (stock market readers) who work hard andgive right direction to the clients for the investment. They keep a track onthe ups and downs in share market and direct their clients accordingly As ittrades within the fixed horizon, chances of risks are negligible as comparedto other brokers. Profit of the company varies as the market conditionsvary. Thus, we can say that functioning of the Company is risk-free.
OBJECTIVES OF THE STUDY:-
1. To understand how stock market moves.
2. To know how a member or a client can invest in stock market.
3. To know the market function of primary & secondary market.
4. To understand intra day and delivery basis transactions.
5. To understand the profitability of equity market.
6. To understand the trading system procedure.
7. To know the recent developments in equity market.
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EQUITY MARKETS IN INDIA - AN OVERVIEW
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INDEX
S.no Topics Page no1 Equity market-introduction
2 Developments In Equity Market
3 Equity As An Investment
4 Investing Principles
5 Primary Market
6 Methods Of Marketing In Primary Market
7 Intermediaries In Primary Market
8 Secondary Market
9 Reasons For Transiting In Secondary Market
10 Listing
11 Delisting
12 Trading
13 Intermediaries In Secondary Market
14 SEBI (Securities & Exchange Board Of India)
15 FIIs & Indian Equity Market
16 2007 A Year To Remember
17 Lessons From Recent Meltdown
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18 Conclusion
19 Bibliography
EQUITY MARKET
In financial markets, stock is the capital raised by a corporation through the
issuance and distribution of shares. A person or organization which holds
shares of stocks is called a shareholder. The aggregate value of a
corporation's issued shares is its market capitalization. When one buys a
share of a company he becomes a shareholder in that company. Shares are
also known as Equities. Equities have the potential to increase in value over
time. It also provides the portfolio with the growth necessary to reach the
long-term investment goals. Research studies have proved that the equities
have out performed than most other forms of investments in the long term.
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Equities are considered the most challenging and the rewarding, when
compared to other investment options.
Research studies have proved that investments in some shares with a longer
tenure of investment have yielded far superior returns than any other
investment. However, this does not mean all equity investments would
guarantee similar high returns. Equities are high-risk investments. One needs
to study them carefully before investing. Since 1990 till date, Indian stock
market has returned about 17% to investors on an average in terms of
increase in share prices or capital appreciation annually. Besides that on
average stocks have paid 1.5 % dividend annually. Dividend is a percentage
of the face value of a share that a company returns to its shareholders from
its annual profits.
Compared to most other forms of investments, investing in equity shares
offers the highest rate of return, if invested over a longer duration.
The first company to issue shares of stock was the Dutch East India
Company, in 1602. The innovation of joint ownership made a great deal of
Europe's economic growth possible following the Middle Ages. The
technique of pooling capital to finance the building of ships, for example,
made the Netherlands a maritime superpower. Before adoption of the joint-
stock corporation, an expensive venture such as the building of a merchant
ship could only be undertaken by governments or by very wealthy
individuals or families.
Equity markets, the world over, grew at a great speed in the decade of the
nineties. After the bear markets of the late eighties, the world markets saw
one of the largest ever bull markets of more than ten years. The opening up
of Indian economy in the 1990's led to a series of financial sector reforms,
prominent being the capital market reforms. These reforms have led to the
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development of the Indian equity markets to t standards of the major global
equity markets. All this started with the abolition of Controller of Capital
Issues and subsequent free pricing of shares.
The introduction of dematerialization of shares, leading to faster and cheaper
transactions and introduction of derivative products and compulsory rolling
settlement has followed subsequently. Despite a series of stock market
scams and crises beginning from 1992 Harshad Mehta's scam to the Ketan
Parekh's 2001 scam, the Indian equity markets have transformed themselves
from a broker dominated market to a mass market.
The introduction of online trading has given a much-needed impetus to the
Indian equity markets. However, over the years, reforms in the equity
markets have brought the country on par with many developed markets on
several counts. Today, India boasts of a variety of products, including stock
futures, an instrument launched only by select markets.
The introduction of rolling settlement is the latest step in the direction of
overhauling the stock market. The equity market of the country will most
likely be comparable with the world's most advanced secondary markets
with regard to international best practices. The market moved to compulsory
rolling settlement and now all settlements are executed on T+2 basis and
market is gearing up for moving to T+1 settlement in 2004 while the
Straight Through Processing (STP) is in place from December 2002.
The importance of equity market is increasing. Rightly, realizing the
advantages of resource allocation through market, Government of India and
Reserve Bank of India have been pushing reforms in equity markets. Series
of steps are being taken to remove hurdles, increase market efficiency and to
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make it attractive for the retail investors to take part in the equity market. It
may not be an exaggeration to say that the Indian markets are resourceful to
put themselves on par with the markets of the developed countries. The
Indian markets have assimilated in a relatively lesser time, many a
developments that took long time in the developed markets.
DEVELOPMENTS IN EQUITY MARKET
The Indian Equity Market is more popularly known as the Indian Stock Market. The
Indian equity market has become the third biggest after China and Hong Kong in the
Asian region. According to the latest report by ADB, it has a market capitalization of
nearly $600 billion. As of March 2009, the market capitalization was around $598.3
billion (Rs 30.13 lakh crore) which is one-tenth of the combined valuation of the Asia
region. The market was slow since early 2007 and continued till the first quarter of 2009
The Government of India has been trying to improve market efficiency, enhance
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transparency and bring the Indian Equity Market up to international standards. Many
reform measures have been initiated in the 90s. The principal ones are the formation of
Securities Exchange Board of India (SEBI), repeal of the Capital Issues (Control) Act,
1947, introduction of screen-based trading, shortening of trading cycle, demutualization
of stock exchanges, establishment of depositories disappearance of physical share
certificates and better risk management systems in stock exchanges.
The formation of Sebi was the first attempt towards integrated regulation of the
securities market. Sebi regulates all market intermediaries and has the powers to impose
monetary penalties for misconduct of any intermediary. One of the major stumbling
blocks in fair pricing of capital issues has been the Capital Issues (Control) Act, 1947.
The issuers were denied the opportunity to economically raise money from the capital
market. This is now a matter of the past thanks to the repeal of the Act itself. Sebi has
also issued Disclosure and Investor Protection (DIP) guidelines to ensure fair prices for
the investors, though however, many issuers in the 90s could unfairly price their capital
issues at the cost of the poor common investors.
The introduction of Screen Based Trading Systems (SBTS) by NSE is a major
development in the capital market. This made the markets more efficient. The
geographical barriers to trade were dismantled resulting in increased trading volumes.
This was possible due to the great advancements in the area of information technology.
SBTS electronically matches orders cutting down time, cost and errors, and minimizing
the chances of fraud. Very long settlement cycle was another major hindrance in effecting
deliveries in the equity market. Often the securities were delivered after 30 days or more
due to weekly/fortnightly settlements and carry forward transactions. Sebi has enforced
the discipline to compulsorily settle trades in T+3 days since April 2002. This is slated to
reduce to T+2 days from April 2003. All scrips are now under rolling settlement since
December 2001.
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The Equity Market is incomplete without products to manage risks in portfolio
values. At long last, derivatives trading appeared on Indian exchanges in June 2000.
While the product range in derivatives is still limited (futures and options on stocks and
stock indices), it is certainly a major step forward in broadening the financial markets.
NSE was established as a demutualized structure separating the roles of ownership,
management and trading to eliminate any conflict of interest among the stakeholders to
improve market efficiency and to focus on investor interest. Another notable
development in the Indian equity market has been the introduction of depositories to
dematerialize the share certificates. This avoids physical movement of certificates, bad
deliveries and quicker transfer of ownership of shares. Presently all actively traded shares
are held, traded and settled in demat form. The setting up of National Securities Clearing
Corporation Ltd., (NSCCL) in April 1996 has been a major development in managing
counterparty risks in the equity market. This has helped in increasing trading volumes
since traders are now more confident about default-free settlements. While most of
theabove measures have helped in reinforcing confidence in the Indian equity market by
providing more transparent and efficient buying, selling and transfer of shares.
International Scenario
Global integration, the widening and intensifying of links, between high-income
and developing countries, have accelerated over the years. The correlation of global
markets over a period of time is presented in (Table 1- 2).
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Over the past few years, the financial markets have become increasingly global.
The descriptive statistics of the major markets in terms of daily returns is presented in(Table 1-3), which shows that the markets are increasingly getting interlinked.
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Cross border capital flows have shifted from public transfers to primarily private
sector flows. Indian market has gained from foreign inflows through investment of
Foreign Institutional Investors (FIIs) route. During 2006-07, cumulative net investments
by FIIs amounted to US $ 51,967 million.
Following the implementation of reforms in the securities industry in the past
years, Indian stock markets have stood out in the world ranking. As may be seen from
(Table 1-4), India posted a turnover ratio of 93.1 %, which was quite comparable to the
other developed markets. As per Standard and Poor's Fact Book 2007, India ranked 15th
in terms of market capitalization (18th in 2004 and 17th in 2005) and 18th in terms of
total value traded in stock exchanges and 21st in terms of turnover ratio as of December
2006.
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A comparative study of concentration of market indices and index stocks in different
world markets is presented in the (Table 1-5). It is seen that the index stocks share of total
market capitalization in India is 81.6% whereas US index accounted for 89.5%. The ten
largest index stocks share of total market capitalization is 32.2% in India and 13.4% in
case of US.
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The stock markets worldwide have grown in size as well as depth over the years. As canbe observed from (Table 1-6), the turnover of all markets taken together have grown from
US $ 39.61 trillion in 2004 to US $ 67.91 trillion in 2006. It is significant to note that US
alone accounted for about 48.99 % of worldwide turnover in 2006. Despite having a large
number of companies listed on its exchanges, India accounted for a meager 0.94% in total
world turnover in 2006. The market capitalization of all listed companies taken together
on all markets stood at US $ 54.19 trillion in 2006 (US $ 43.68 trillion in 2005). The
share of US in worldwide market capitalization decreased from 38.85 % as at end-2004
to 35.84 % as at end 2006, while Indian listed companies accounted for 1.51% of total
market capitalization in 2006.
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According to the 'World Development Indicators 2007, World Bank' there has been an
increase in market capitalization as percentage of Gross Domestic Product (GDP) in
some of the major country groups. The increase, however, has not been uniform across
countries. The market capitalization as a percentage of GDP was the highest at 112.9%
for the high income countries as at end 2005 and lowest for middle income countries at
49.5%. Market capitalization as percentage of GDP in India stood at 68.6 % as at end
2005. The turnover ratio, which is a measure of liquidity, was 122.2 % for high-income
countries and 96.6 % for low-income countries. The total number of listed companies
stood at 28,733 for high-income countries, 11,141 for middle-income countries and 6,177
for low-income countries as at end 2006.
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EQUITY AS AN INVESTMENT
Equity is:
1. Stock or any other security representing an ownership interest.
2. On the balance sheet, the amount of the funds contributed by the owners (the
stockholders) plus the retained earnings (or losses), also referred to as "shareholder's
equity".
3. In the context of margin trading, the value of securities in a margin account minus
what has been borrowed from the brokerage.
Equity is a term whose meaning depends very much on the context. In general,
one can think of equity as ownership in any asset after all debts associated with that asset
are paid off. For example, a car or house with no outstanding debt is considered theowner's equity since he or she can readily sell the items for cash. Stocks are equity
because they represent ownership of a company, whereas bonds are classified as debt
because they represent an obligation to pay and not ownership of assets.
The ability of equities to deliver over longer time frames and even outperform other
investment avenues like gold, property and bonds is an often chronicled fact. However,
over shorter time frames, equities also hold the potential to be a very risky asset class and
expose the portfolio to high levels of volatility. This is the primary reason why any fund
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manager worth his salt always recommends a sufficiently long (at least 3 years) time
frame for an equity-oriented investment. Similarly financial planners advocate pruning of
the equity holdings with advancement in the investors age, when the investor is typically
closer to retirement (shorter investment horizon) and has a lower risk appetite as well.
INVESTING PRINCIPLES
1. Invest for Real Returns
2. Keep an Open Mind
3. Never Follow the Crowd
4. Everything Changes
5. Avoid the Popular
6. Learn from your Mistakes
Equity Markets In India An Overview 12
7. Buy During Times of Pessimism
8. Hunt for Value and Bargains
9. Search Worldwide
10. No-one Knows Everything
If you buy the same securities as other people, you will have the same results as
other people. It is impossible to produce a superior performance unless you do something
different from the majority. To buy when others are despondently selling and to sell when
others are greedily buying requires the greatest fortitude and pays the greatest reward.
Bear markets have always been temporary. And so have bull markets. Share pricesusually turn upward from one to twelve months before the bottom of the business cycle
and vice versa. If a particular industry or type of security becomes popular with investors,
that popularity will always prove temporary and, when lost, may not return for many
years.
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The investor should bear in mind that while he makes investment decision, he
should have idea of the companys break-even point and companys position in the stock
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exchange. For this EQUITY RESEARCH is done. Equity Research does the research of
companys income and growth. In the process, it uses the various sources of financial
information available in the country and accordingly advises in which company an
investor should invest.
FUNDAMENTAL ANALYSIS
The investor while buying stock has the primary purpose of gain. If he invests for a short
period of time it is speculative but when he holds it for a fairly long period of time the
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anticipation is that he would receive some return on his investment. Fundamental analysis
is a method of finding out the future price of a stock, which an investor wishes to buy.
The method for forecasting the future behavior of investments and the rate of return on
them is clearly through an analyze of the broad economic forces in which they operate.
The kind of industry to which they belong and the analysis of the company's internal
working through statements like income statement, balance sheet and statement of
changes of income.
ECONOMIC ANALYSIS
inestors are concerned with those forces in the economy, which affect the performance of
organizations in which they wish to participate, through purchase of stock. A study of the
economic forces would give an idea about future corporate earnings and the payment of
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dividends and interest to investors. Some of the broad forces within which the factors of
investment operate are:
1. POPULATION: -
Population gives an idea of the kind of labor force in a country. In some countries
the population growth has slowed down whereas in India and some other third world
countries there has been a population explosion. Population explosion will give demand
for more industries like hotels, residences, service industries like health, consumer
demand like refrigerators and cars. Likewise, investors should prefer to invest in
industries, which have a large amount of labor force because in the future such industries
will bring better rates of return.
2. RESEARCH AND TECHNOLOGICAL DEVELOPMENTS: -
The economic forces relating to investments would be depending on the amount
of resources spent by the government on the particular technological development
affecting the future. Broadly the investor should invest in those industries which are
getting a large amount of share in the funds of the development of the country. For
example, in India in the present context automobile industries and spaces technology are
receiving a greater attention. These may be areas, which the investor may consider for
investments.
3. CAPITAL FORMATION: -
Another consideration of the investor should be the kind of investment that a
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company makes in capital goods and the capital it invests in modernization and
replacement of assets. A particular industry or a particular company which an investor
would like to invest can also be viewed at with the help of the economic indicators such
as the place, value and property position of the industry, group to which it 110ngs and the
year-to-year returns through corporate profits.
4. NATURAL RESOURCES AND RAW MATERIALS: -
The natural resources are to a large extent responsible for a country's economic
development and overall improvement in the condition of corporate growth. In India,
technological discoveries recycling of materials, nuclear and solar energy and new
synthetics should give the investor an opportunity to invest in untapped or recently
tapped resources which would also produce higher investment opportunity.
INDUSTRIAL ANALYSIS
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The industry has been defined as homogeneous groups of people doing a similar
kind of activity or similar work. In India, the broad classification of industry is made
according to stock exchange list, which is published. This gives a distinct classification to
industry to industry in different forms such as:
(A) Engineering,
(B) Banking and Insurance,
(C) Textiles,
(D) Cement,
(E) Steel Mills and Alloys,
(F) Chemicals and Pharmaceuticals,
(G) Retail,
(H) Sugar,
(I) Information Technology,
(J) Automobiles and Ancillary,
(K) Telecommunications,
(L) FMCG,
(M) Miscellaneous.
Industry should also be evaluated or analyzed through its life cycle. Industry life
cycle may also be studied through the industrial life cycle state. There are generally three
stages of an industry. These stages are pioneering stage, expansion stage and stagnation
stage.
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1. THE PIONEERING STAGE: -
The industrial life cycle has a pioneering stage when the new inventions and
technological developments take place. During this time the investor will notice great
increase in the activity of the firm. Production will rise and in relation to production,
there will be a great demand for the product. At this stage, the profits are also very high
as the technology is new. Taking a look at the profit many new firms enter into the same
field and ill; market becomes competitive. The market competitive pressures keep on
increasing with the en" of new-firms and the prices keep on declining and then ultimately
profits fall. At this stage all firms compete with each other and only a few efficient firms
are left to run the business and most of the other firms are wiped out in the pioneering
stage itself.
2. THE EXPANSION STAGE: -
The efficient firms, which have been in the market now, find that it is time to
stabilize them. Although competition is there, the, number of firms have gone down
during ill pioneering stage itself and there are a large number of firms left to run the
business in the industry. This is the time when each one has to show competitive strength
and superiority. The investor will find that this is the best time to make an investment. At
the pioneering stage it was difficult to find out which of the firm to invest in, but having
waited for the stability period there has been a dynamic selection process and a few of the
large number of firms are left in the industry. This is the period of security and safety
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and this is also called period of maturity for the firm. This stage lasts from five years to
fifty years of a firm depending on the potential and productivity and policy to meet the
change of competition and rapid change in buyer and customer habit. After this stage
develops the stage of stagnation or obsolescence.
3. THE STAGNATION STAGE: -
During the stagnation stage the investor will find that although there is increase in
sales of an organization, this is not in relation to the profits earned by the company.
Profits are also there but the growth in the firm is lower than it was in the expansion
stage. The industry finds that it is at a loss of power and cannot expand. During most of
the firms who have realized the competitive nature of the industry and the arrival of the
stagnation stage, begin to change their course of action and start on a new venture should
make a continuous evaluation of their investments. In firms in which they have received
profits for large number of years and have reached stagnation they can plan to their
investments and find better avenues in those firms where the expansion stage has set in.
COMPANY ANALYSIS
Company analysis is a study of the variables that influence the future of a firm
both qualitatively and quantitatively. It is a method of assessing the competitive position
of a firm earning and profitability, the efficiency with which it operates its financial
position and its ful1l with respect to the earning of its shareholders. The fundamental
nature of this analysis is that each share of a company has an intrinsic value, which is
dependent on the company's financial performance, quality of management and record of
its earnings and dividend. They believe that the market price of share in a period of time
will move towards its intrinsic value. If the market price of a share is lower than the
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intrinsic value, as evaluated by the fundamental analysis, then the share is supposed to be
undervalued and it should be purchased but if the current market price shows that it is
more than intrinsic value then according to the theory the share should be sold.
This basic approach is analyzed through the financial statements of an
organization. The basic financial statements, which are required as tools of the
fundamental analyst, are the income statement, the balance sheet, and the statement of
Equity Markets In India An Overview 19
changes in financial position. These statements are useful for investors, creditors as well
as internal management of a firm and on the basis these statements the future course of
action may be taken by the investors of the firm. While evaluating a company, its
statement must be carefully judged to find out that they are:
(a) Correct,
(b) Complete,
(c) Consistent and
(d) Comparable
TECHNICAL ANALYSIS
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Technical analysis is simply the study of prices as reflected on price charts.
Technical analysis assumes that current prices should represent all known information
about the markets. Prices not only reflect intrinsic facts, they also represent human
emotion and the pervasive mass psychology and mood of the moment. Prices are, in the
end, a function of supply and demand. However, on a moment to moment basis, human
emotionsfear, greed, panic, hysteria, elation, etc. also dramatically effect prices.
Markets may move based upon peoples expectations, not necessarily facts. A market
"technician" attempts to disregard the emotional component of trading by making his
decisions based upon chart formations, assuming that prices reflect both facts and
emotion. Analysts use their technical research to decide whether the current market is a
BULL MARKET or a BEAR MARKET.
1. STOCK CHARTS
A stock chart is a simple two-axis (X-Y) plotted
graph of price and time. Each individual equity, market
and index listed on a public exchange has a chart that
illustrates this movement of price over time. Individual
data plots for charts can be made using the CLOSING
price for each day. The plots are connected together in a
single line, creating the graph. Also, a combination of the
OPENING, CLOSING, HIGH and/or LOW prices for that market session can be used for
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the data plots. This second type of data is called a PRICE BAR. Individual price bars are
then overlaid onto the graph, creating a dense visual display of stock movement. Stock
charts can be drawn in two different ways. An ARITHMETIC chart has equal vertical
distances between each unit of price. A LOGARITHMIC chart is a percentage growth
chart.
2. TRENDS
The stock chart is used to identify the current
trend. A trend reflects the average rate of
change in a stock's price over time. Trends exist
in all time frames and all markets. Trends can be
classified in three ways: UP, DOWN or
RANGEBOUND. In an uptrend, a stock rallies
often with intermediate periods of consolidation
or movement against the trend. In doing so, it
draws a series of higher highs and higher lows
on the stock chart. In an uptrend, there will be a POSITIVE rate of price change over
time. In a downtrend, a stock declines often with intermediate periods of consolidation or
movement against the trend. In doing so, it draws a series of lower highs and lower lows
on the stock chart. In a downtrend, there will be a NEGATIVE rate of price change over
time. Range bound price swings back and forth for long periods between easily seen
upper and lower limits. There is no apparent direction to the price movement on the stock
chart and there will be LITTLE or NO rate of price change. Trends tend to persist overtime. A stock in an uptrend will continue to rise until some change in value or a condition
occurs. Declining stocks will continue to fall until some change in value or conditions
occur. Chart readers try to locate TOPS and BOTTOMS, which are those points where a
rally or a decline ends. Taking a position near a top or a bottom can be very profitable.
Trends can be measured using TRENDLINES. Very often a straight line can be drawn
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UNDER three or more pullbacks from rallies or OVER pullbacks from declines. When
price bars then return to that trend line, they tend to find SUPPORT or RESISTANCE
and bounce off the line in the opposite direction.
3. VOLUME
Volume measures the participation of the
crowd. Stock charts display volume through
individual HISTOGRAMS below the price
pane.Often these will show green bars for up
days and redbars for down days. Investors
and traders can measure buying and selling
interest bywatching how many up or down
days in a row occur and how their volume
compare swith days in which price moves in
the opposite direction.Stocks that are bought with greater interest than sold are said to be
underACCUMULATION. Stocks that are sold with great interest than bought are said to
be under DISTRIBUTION. Accumulation and distribution often LEAD price movement.
In other words, stocks under accumulation often will rise some time after the buying
begins. Alternatively, stocks under distribution will often fall some time after selling
begins.It takes volume for a stock to rise but it can fall of its own weight. Rallies require
the enthusiastic participation of the crowd. When a rally runs out of new participants, a
stock can easily fall. Investors and traders use indicators such as ON BALANCEVOLUME to see whether participation is lagging (behind) or leading (ahead) the price
action. Stocks trade daily with an average volume that determines their
LIQUIDITY.Liquid stocks are very easy for traders to buy and sell. Liquid stocks require
very high SPREADS (transaction costs) to buy or sell and often cannot be eliminated
quickly froma portfolio. Stock chart analysis does not work well on illiquid stocks.
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4. PATTERNS AND INDICATORS
How can one organize the endless stream of stockchart data into a logical format? Charts
allow investors and traders to look at
past and presentprice action in order to
make reasonable predictions and wise
choices. It is a highly visual medium.
Thisone fact separates it from the colder
world of value-based analysis. The stock
chartactivates both left-brain and right-
brain functions of logic and creativity.
So it's no
surprise that over the last century two forms of analysis have developed that focus
along these lines of critical examination. The oldest form of interpreting charts is
PATTERN ANALYSIS. This method gained popularity through both the writings of
Charles Dow and Technical Analysis of Stock Trends, a classic book written on the
subject just after World War II. The newer form of interpretation is INDICATOR
ANALYSIS, a math-oriented examination in which the basic elements of price and
volume are run through a series of calculations in order to predict where price will go
next. Pattern analysis gains its power from the tendency of charts to repeat the same barformations over and over again. These patterns have been categorized over the years as
having a bullish or bearish bias. Some well-known ones include HEAD and
SHOULDERS, TRIANGLES, RECTANGLES, DOUBLE TOPS, DOUBLE BOTTOMS
and FLAGS. Also, chart landscape features such as GAPS and TRENDLINES are said to
have great significance on the future course of price action. Indicator analysis uses math
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calculations to measure the relationship of current price to past price action. Almost all
indicators can be categorized as TREND-FOLLOWING or OSCILLATORS. Popular
trend-following indicators include MOVING AVERAGES, ON BALANCE VOLUME
and MACD. Common oscillators include STOCHASTICS, RSI and RATE OF
CHANGE. Trend-following indicators react much more slowly than oscillators. They
look deeply into the rear view mirror to locate the future. Oscillators react very quickly to
short-term changes in price, flipping back and forth between OVERBOUGHT and
OVERSOLD levels.
Both patterns and indicators measure market psychology. The core of investors
and traders that make up the market each day tend to act with a herd mentality as price
rises and falls. This "crowd" tends to develop known characteristics that repeat
themselves over and over again. Chart interpretation using these two important analysis
tools uncovers growing stress within the crowd that should eventually translate into price
change.
5. MOVING AVERAGES
The most popular technical indicator for
studying stock charts is the MOVING
AVERAGE.This versatile tool has many
important uses for investors and traders.
Take the sum of any number ofprevious
CLOSE prices and then divide it by that
same number. This creates an average
price for that stock in that period of time.
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A moving average can be displayed by re-computing this result daily and plotting it in the
same graphic pane as the price bars. Moving averages LAG price. In other words, if price
starts to move sharply upward or downward, it will take some time for the moving
average to "catch up". Plotting moving averages in stock charts reveals how well current
price is behaving as compared to the past. The power of the moving average line comes
from its direct interaction with the price bars. Current price will always be above or
below any moving average computation. When it is above, conditions are "bullish".
When below, conditions are "bearish". Additionally, moving averages will slope upward
or downward over time. This adds another visual dimension to a stock analysis. Moving
averages define STOCK TRENDS. They can be computed for any period of time.
Investors and traders find them most helpful when they provide input about the SHORT-
TERM, INTERMEDIATE and LONG-TERM trends. For this reason, using multiple
moving averages that reflect these characteristics assist important decision making.
Commons moving average settings for daily stock charts are 20 days for shortterm, 50
days for intermediate and 200 days for long-term. One of the most common buy or sell
signals in all chart analysis is the MOVING AVERAGE CROSSOVER. These occur
when two moving averages representing different trends. For example, when a short-term
average crosses BELOW a long-term one, a SELL signal is generated. Conversely, when
a short-term crosses ABOVE the long-term, a BUY signal is generated. Moving averages
can be "speeded up" through the application of further math calculations. Common
averages are known as SIMPLE or SMA. These tend to be very slow. By giving more
weight to the current changes in price rather than those many bars ago, a faster
EXPONENTIAL or EMA moving average can be created. Many technicians favor the
EMA over the SMA. Fortunately all common stock chart programs, online and offline do
the difficult moving average calculations but plot price perfectly.
6. SUPPORT AND RESISTANCE:-
The concept of SUPPORT AND
RESISTANCE is essential to understanding
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and interpreting stock charts. Just as a ball bounces when it hits the floor or drops after
being thrown to the ceiling, support and resistance defines natural boundaries for rising
and falling prices. Buyers and sellers are constantly in battle mode. Support defines that
level where buyers are strong enough to keep price from falling further. Resistance
defines that level where sellers are too strong to allow price to rise further. Support and
resistance play different roles in uptrends and downtrends. In an uptrend, support is
where a pullback from a rally should end. In a downtrend, resistance is where a pullback
from a decline should end. Support and resistance are created becauseprice has memory.
Those prices where significant buyers or sellers entered the market inthe past will tend to
generate a similar mix of participants when price again returns to that level. When price
pushes above resistance, it becomes a new support level. When price
falls below support, that level becomes resistance. When a level of support or resistance
is penetrated, price tends to thrust forward sharply as the crowd notices the BREAKOUT
and jumps in to buy or sell. When a level is penetrated but does not attract a crowd of
buyers or sellers, it often falls back below the old support or resistance. This failure is
known as a FALSE BREAKOUT. Support and resistance come in all varieties and
strengths. They most often manifest as horizontal price levels. But trend lines at various
angles represent support and resistance as well. The length of time that a support or
resistance level exists determines the strength or weakness of that level. The strength or
weakness determines how much buying or selling interest will be required to break the
level. Also, the greater volume traded at any level, the stronger that level will be.
Support and resistance exist in all time frames and all markets. Levels in longer time
frames are stronger than those in shorter time frames. The ideas of Charles Dow, the first
editor of the Wall Street Journal, form the basis of technical analysis today. The behavior
patterns that he observed apply to markets throughout the world.
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PRIMARY MARKET
Primary market is the place where issuers create and issue equity, debt or hybrid
instruments for subscription by the public; the secondary market enables the holders of
securities to trade them. Primary market is a market for raising fresh capital in the form
of shares. Public limited companies that are desirous of raising capital funds through the
issue of securities approach this market. The public limited and government companies
are the issuers and individuals, institutions and mutual funds are the investors in this
market. The primary market allows for the formation of capital in the country and the
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accelerated industrial and economic development. Everywhere in the world capital
markets have originated as the new issues markets. Once industrial companies are set up
in a big number and with them a considerable volume of business comes into existence a
market for outstanding issues develops. In the absence of secondary market or the stock
exchange, the capital market will be paralyzed. This is on account of the reason that the
business enterprises borrow money from the capital market for a very long period but the
investors or savers whose savings are canalized through the capital market generally wish
to invest only for a short period. Existence of the stock exchange provides a medium
through which these two ends can be reconciled. It enables the investors to sell their
shares for money whenever they wish to do so. Thus, the business enterprises keep the
possession of permanent capital; the shares can keep on changing hands. In order to sell
securities, the company has to fulfill various requirements and decide upon the
appropriate timing and method of issue. It is quite normal to obtain the
assistance of underwriters, merchant banks or special agencies to look after these aspects.
METHODS OF MARKETING IN PRIMARY
MARKET
1. PUBLIC ISSUE: -
A public limited company can raise the amount of capital by selling its shares to
the public. Therefore, it is called public issue of shares or debentures. For this purpose it
has to prepare a 'Prospectus'. A prospectus is a document that contains information
relating to the company such as name, address, registered office and names and addresses
of company promoters, managers, Managing Director, directors, company secretary, legal
advisors, auditors and bankers. It also includes the details about project, plant location,
technology, collaboration, products, export obligations etc. The company has to appoint
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brokers and underwriters to sell the minimum number of shares and it has to fix the date
of opening and closing of subscription list.
The new issue of shares or debentures of a company are offered for exclusive
subscription of general public. The prospectus should be approved by SEBI. A minimum
of 49 per cent of the amount of the issue at a time is to be offered to public. The company
makes a direct offer to the general public to subscribe the securities of a stated price. The
securities may be issued at par, at discount or at a premium. An existing company may
sell the shares at a premium. There is no practice of selling shares at a discount in India.
Public issue is a popular method of raising capital. It provides wide distribution of
ownership securities. It also promotes confidence of investors through transparency and
non-discriminatory basis of allotment. It satisfies compliance with the legal requirements.
However, the issue of securities through prospects is time consuming because there are
various formalities to be completed by the company. The cost of raising capital is also
very high due to underwriting, commission, brokerage, publicity, legal, and other
administrative costs.
2. PRIVATE PLACEMENT: -
A Company makes the offer of sale to individuals and institutions privately
without the issue of a prospectus. This saves the cost of issue of securities. The securities
are placed at higher prices to individuals and institutions. Institutional investors play a
very important role in the private placement. This has become popular in recent days.
This method is less expensive and time saving. The company has to complete a
very few formalities. It is suitable for small companies as well as new companies. This
method can be used when the stock market is bull. However, the private placement helps
to concentrate securities in the few hands. They can create artificial scarcity and increase
the prices of shares temporarily and then sell the shares in the stock market and mislead
the common and small investors. This method also deprives the common investors of an
opportunity to subscribe to the issue of shares.
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3. OFFER FOR SALE: -
A Company sells the securities through the intermediaries such as issue houses,and stockbrokers. This is known as an offer for sale method. Initially, the company
makes an offer for sale of its securities to the intermediaries stating the price and other
terms and conditions. The intermediaries can make negotiations with the company and
finally accept the offer and buy the shares from the company. Then these securities or
shares are re-sold to the general investors in the stock market normally at a higher price
in order to get profit. The intermediaries have to bear the expenses of this issue. The
object of this issue is to save the time, cost and get rid of complicated procedure involved
in the marketing of securities. The issues can also be underwritten in order to ensure full
subscription of the issue. The general publics get the shares at a higher price the
middlemen are more benefited in this process.
4. BOUGHT OUT DEALS: -
A Company makes an outright sale of equity shares to a single sponsor or the lead
sponsor and such deals are known as bought out deals. There are three parties involved in
the bought out deals. The promoters of the company, sponsors and co-sponsors, sponsors
are merchant bankers and co-sponsors are the investors. There is an agreement in which
an outright sale of a chunk of equity shares is made to a single sponsor or the lead
sponsor. The sale price is finalized through negotiations between the issuing company
and the purchasers. It is influenced by various factors such as project evaluation,
reputation of the promoters, current market sentiments etc. Bought out deals are in the
nature of fund-based activity where the funds of the merchant bankers are locked in for at
least for a minimum period. These shares are sold at over the Counter Exchange of India
or at a recognized stock exchange. Listing takes place when the company gets profits and
performs well. The investor-sponsors make profits because the shares are listed at higher
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price.
5. INITIAL PUBLIC OFFER: -
When a company makes public issue of shares for the first time, it is called Initial Public
Offer. The securities are sold through the issue of prospectus tosuccessful applicants on
the basis of their demand. Thecompany has to appoint underwriters in order to guarantee
the minimum subscription. Anunderwriter is generally an investment banking company.
The underwriter agrees to paythe company a certain price and buy a minimum number
of shares, if they are notsubscribed by the public. The underwriter charges some
commission for this work. Hecan sell these shares in the market afterwards and make
profit. There may be two or moreunderwriters in case of large issue.
The company has to issue a prospectus giving full information about the company
And the issue. It has to issue share application forms through the brokers and
Underwriters. The brokers collect orders from their clients and place orders with the
Company. The company then makes the allotment of shares with the help of stock
Exchange. The share certificate are delivered to the investors or credited to their demat
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Accounts through the depository. This method saves time and avoids complicated
Procedure of issue of shares.
With more and more companies coming out with tempting IPO or additional
Offers, there is greater need to exert caution and pick the best IPO investments.
Following
four critical factors should be studied in an IPO offer document, before making an IPO
Investment: Promoter, Performance, Prospects and Price.
_Check Promoter Standing
This by far is the most important factor in any investment decision. A good
promoter or management team is important for any business success, especially over long
Periods. While businesses may have their ups and downs, a good management will take
all necessary steps to ensure profitable performance. Secondly, they would be constantly
looking at new business opportunities, thereby ensuring regular growth in the company.
Thirdly, we are reasonably certain that the company money will not be deliberately
Misused or siphoned off to the detriment of the shareholders.
Therefore, look at the promoters background, the experience he has in the
Industry, the performance of the other companies promoted by him, his track record,
Investor complaints etc. Read the risk factors very carefully especially those pertaining toThe promoter/management. Check for any serious litigation against the promoter or the
Company. See whether the company is a defaulter to the banks/FIs and the reason
thereof.
_Study Company Performance
The share price is the reflection of the operational performance of the company.
Poor numbers say the sales, profit, EPS etc. would mean poor performance on the stock
exchange. Therefore, it is important that the company has a track record of good
operational performance. Look for any window dressing. Are the numbers in line with
the similar companies in the industry? Is there any sudden improvement in the numbers
just before the issue, without any justifiable reasons? Also look at the performance of the
group companies and the inter-company transaction within the group. Ensure that there
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are no dubious transactions. Look at the loans given to group companies. Are they paying
reasonable interest? Is the loan likely to be repaid?
_Understand Future Prospects
The future prospects of the Company and the industry would play an important
role in the performance of the scrip on the stock exchange. Check the objects. How will
they impact the future prospects? How will the funds raised be utilized? Will it
additionally benefit the company? Is the money being raised for a new project, which will
add to the bottom-line of the company?
Equity Markets In India An Overview 33
If its an offer-for-sale, it means the existing shareholders are selling a part of
their stake in the Company. The amounts raised from the issue will not go to the
Company. Therefore, the Company will not benefit from an offer for sale. If the purpose
of the issue is to list the company on the stock exchange and the 4 Ps are positive, then
one can consider investing.
_Look At The Price
Finally of course every product/scrip has a right price based on its fundamentals
and industry prospects. Even if the above 3 Ps were favorable, a high price is likely toreduce the prospects of appreciation at the exchange, thereby defeating your purpose of
investing.
Look at the average industry PE and the companiess EPS and try to estimate the
fair price. Compare this with the issue price to see if it is undervalued or overvalued. Buy
value nor price. Issues which are overvalued such issues tend to quote below issue price
over a period of time and it may be prudent to enter then, than at the IPO stage.
For follow-on issues the price is more or less known. Therefore, there may not be
much listing gain or loss. Again look for fair valued or undervalued scrip. A little time
spent in reading the offer document and analyzing the IPO on the above factors will help
you to make right investment decisions and prevent you from ending-up holding a dud
stock.
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6. RIGHT ISSUE: -
When an existing company issues shares to its existing shareholders in proportionto the number of shares held by them, it is known as Rights Issue. Rights issue is
obligatory for a company where increase in subscribed capital is necessary after two
years of its formation or after one year of its first issue of shares, whichever is earlier.
SEBI has issued guidelines for issue of right shares. Accordingly, only a listed company
can make right issue. Rights issue can be made only in respect of fully paid up shares. No
reservation is allowed for rights issue of fully or partly convertible debentures. The
company has to make announcement of rights issue and once the announcement is made
it cannot be withdrawn. The company has to make the appointment Registrar but
underwriting is optional. It has also to appoint category I Merchant Bankers holding a
certificate of registration issued by SEBI. Letter of offer should contain disclosures as per
SEBI requirements. The rights issue should be open for minimum period of 30 days, and
maximum up to 60 days. The company has to make an agreement with the depository for
materialization of securities to be issued in demat form. A minimum subscription of 90
per cent of the issue should be received. A no complaints certificate is to be filed by the
Lead Merchant Banker with the SEBI after 21 days from the date of issue of offer
document.
7. BONUS ISSUE: -
Bonus shares are the shares allotted by capitalization of the reserves or surplus of
a company. Issue of bonus shares results in conversion of the company's profits or
reserves into share capital. Therefore, it is capitalization of company's reserves. Bonus
shares are issued to the equity shareholders in proportion to their holdings of the equity
share capital of the company. Issue of bonus shares does not affect the total capital
structure of the company. It is simply a capitalization of that portion of shareholders
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equity which is represented by reserves and surplus. The issues of bonus shares are issued
subject to certain rules and regulations. Issue of bonus shares reduces the market price of
the company's shares and keeps it within the reach of ordinary investors. The company
can retain earnings and satisfy the desire of the shareholders to receive dividend. Issue of
bonus shares is generally an indication of higher future profits. Receipt of bonus shares as
compared to cash dividend generally results in tax advantage to the shareholder.
8. BOOK-BUILDING: -
Companies generally raise capital through public issue. In these cases companies
decide the size of the issue and also the price at which the shares are to be offered to the
investors. However in this system the issuer is not able to ascertain the price that the
market may be willing to pay for the shares, before launching the issue. This is where
book building can come to their aid. This method is also known as the price discovery
method. This is a mechanism where by the price is determined on the basis of actual
demand as evident form the offers given by the various institutional investors and the
underwriters.
In the actual public offer process, investors are not involved in determining the
offer price, whereas in book building pricing is determined on the basis of investor
feedback which assures investor demand. Since the issue price after the issue marketing
there is flexibility in the issue size and the price of the shares.
The option of book building is available to all body corporate, which are
otherwise eligible to make issue of capital to the public. The initial minimum size of issue
through book-building process was fixed at Rs. 100 crores/-. However, issue of any size
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was allowed since 1996. Book-Building facility is available as an alternative to firm
allotment. A Company can opt for book-building process for the sale of securities to the
extent of the percentage of the issue. that can be reserved for firm allotment.
Book-Building method helps in evaluating the intrinsic worth of an instrument
and the company's credibility in the eyes of the investor. The company also gets firm
commitments on the basis of which it can decide whether to go or not to go for a
particular issue of securities. Book-Building process also provides reliable allotment
procedure and quick listing of shares on the stock exchanges. There is no price
manipulation because the price is determined on the basis of bids received' from the
investors.
The following stages are involved in the book-building process:
(1) Appointment of book-runners.
(2) Drafting of prospectus and getting approval from SEBI.
(3) Circulating draft prospectus.
(4) Maintaining offer details.
(5) Intimation of aggregate orders to the book-runner.
(6) Bid analysis.
(7) Mandatory underwriting.
(8) Filing copy of prospectus with registrar of companies.
(9) Opening bank accounts for collection of application money.
(10) Collection of applications.
(11) Allotment of shares.
(12) Payment schedule and listing of shares.
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LISTING
Listing is a process involved in listing something
with some one. It is a permission to quote shares and
debentures officially on the trading floor of the stock
exchange. The listed shares appear on the official list
of securities for the purpose of trading security listing
is a step that is required to register and to place on
record the security of a company with the appropriate authority i.e. the recognized stock
exchange. Securities are required to be listed under Section 9 of the Securities Contract
(Regulation) Act, 1956. Thus, listing simply means the inclusion of any security for the
purpose of trading in a recognized stock exchange. Only public companies are allowed to
list their securities in the stock exchange. Private Limited companies cannot get listin list
their securities in the stock exchange. Private Limited companies cannot get listing
facility. They shall first convert themselves into public limited companies and their
Articles of Association shall contain prohibitions as laid down in the listing agreement
and as applicable to public limited companies.
The issuer wishing to have trading privileges for its securities satisfies listingrequirements prescribed in the relevant statutes and in the listing regulations of the
Exchange. It also agrees to pay the listing fees and comply with listing requirements on a
continuous basis. All the issuers who list their securities have to satisfy the corporate
governance requirement framed by regulators. The prices at which the securities are
traded in the stock exchange are published in the newspapers. Investors are able to know
these price trends from such publications. Compared to listed securities the trading of
unlisted securities is difficult. The price trends in respect of unlisted securities are seldom
known to the investors and the contract between the seller and buyer takes places mostly
on one to one basis.
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LISTING PROCEDURE: -
The listing procedure involves making a simple
application by the company and payment of listing
fees asprescribed by the respective stock exchange.
It is to becompleted before the offer of securities to
the public and registration of prospectus with the
Registrar of Companies. The recognized stock
exchange has to give approval and then make anagreement stating the terms and conditions.
Registration and recording is done for the purpose of trading by the registered members g
of the stock exchange and for the official quotation of the security price for the benefit of
the public and the investors. The company has to continue listing by paying renewal fees
from time to time. Listing is mandatory for a public company, which intends to offer its
securities to the public by issue of prospectus and which wishes to provide facilities to
the securities being offered to the public. Any allotment of securities made in the absence
of listing or refusal of listing is held to be void i.e. illegal. Again, any failure to comply
with the Section 21 of the Securities Contracts (Regulation) Act attracts penalty to the
parties. The authority of the stock exchange may refuse listing of the securities of a
company. The authorities should intimate the company within 15 days with the reasons
for refusal. The company can make an appeal to the Central Government within a
prescribed period. The Central Government may either grant or refuse to grant the
permission for listing and the decision of the Central Government would be informed to
the stock exchange concerned that shall act in conformity with such a decision. The stock
exchange is empowered to suspend or withdraw an admission to dealing in securities of
company for breach or non-compliance with the listing provision on giving an
opportunity of being heard in writing. In an eventuality where any withdrawal or
suspension exceeds 3 months, the company may appeal to the SEBI who may either vary
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or set aside the decision of the stock exchange.
CENTRAL LISTING AUTHORITY: -
The compliance with the listing requirements was being hitherto seen by each
stock exchange on which the securities of the company are proposed to be listed. These
requirements defer from exchange to exchange. SEBI has initiated steps to set up of a
central listing authority, which would accord approval. This approval would enable all
the stock exchanges, on which the securities of the companies and Mutual Funds are
going to be listed, to list the securities at an early date. The central listing authority would
ad as a check on the fly by night operators who float public issues, since the listing norms
would be uniformly applied as against the current practice where the norms could be
flouted, if listing is to take place in a very small exchange where the listing
requirements may be lenient.
LISTING AGREEMENT: -
All companies seeking listing of their securities on the Exchange are required to enter
into a listing agreement with the Exchange. The agreement specifies all the requirements
to be continuously complied with by the issuer for continued listing. The Exchange
monitors such compliance. Failure to comply with the requirements invites suspension of
trading, or withdrawal/delisting, in addition to penalty under the Securities Contracts
(Regulation) Act, 1956. The agreement is being increasingly used as a means to improve
corporate governance.
TYPES OF LISTING
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Listing of securities falls under 5 groups
1. INITIAL LISTING: -
If the shares or securities are to be listed for the first time by a company on a
stock exchange is called initial listing.
2. LISTING FOR PUBLIC ISSUE: -
When a company whose shares are listed on a stock exchange comes out with a
public issue of securities, it has to list such issue with the stock exchange.
3. LISTING FOR RIGHTS ISSUE: -
When companies whose securities are listed on the stock exchange issue
securities to existing shareholders on rights basis, it has to list such rights issues on the
concerned stock exchange.
4. LISTING OF BONUS SHARES: -
Shares issued, as a result of capitalization of profit through bonus issue shall list
such issues also on the concerned stock exchange.
5. LISTING FOR MERGER OR AMALGAMATION: -
When an amalgamated company issues new shares to the shareholders of the
amalgamating company, such shares are also required to be listed on the concerned stock
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exchange.
CHARACTERISTICS OF LISTING
The following are the characteristics of listing of securities:
1. AGREEMENT: -
Listing agreement is made between the respective stock exchange and the
company. The company offers or issues the securities to the public through the issue of
offer document like prospectus or a letter of offer. The stock exchange is a recognized
stock exchange where the securities are listed for trading.
2. PURPOSE: -
The purpose of listing is to ensure free transferability of securities so as to
facilitate clear transparency and open disclosure of information relating to the affairs of
the company whose securities are listed. In addition, official quotation and liquidity in the
trading of listed securities is also ensured
.
3. RESTRICTION: -
A company is free to have its securities listed in any number of stock exchanges.
It is important that the securities are listed at least on the regional stock exchange.
4. INVESTOR PROTECTION: -
Listing offers a measure of protection to the investors. It is a barometer of
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performance and continued good performance of the company.
BENEFITS OF LISTING
Listing of securities is beneficial to company as well as to investors:
1. TO THE COMPANY: -
1. The company enjoys concessions under Direct Tax Laws as such companies are
known as companies in which public are substantially interested resulting in low rate
of income tax payable by them.
2. The company gains national and international importance by share value quoted on
stock exchanges.
3. Financial institution and banks extend term loan facilities in the form of rupee
currency and foreign currency loan.
4. It helps the company to mobilize resources from the shareholders through ' Right
Issue' for programs of expansion and modernization without depending on the
financial institutions in line with the government policies.
5. It ensures wide distribution of shareholding thus avoiding fears of easy takeover of
the organization by others.
2. TO THE INVESTORS: -
1. Since the securities are officially traded, liquidity of investment by the investors is
well ensured.
2. Rights entitlement in respect of further issues can be disposed of in the market.
3. Listed securities are well preferred by the bankers for extending loan facilities.
4. Official quotations of the securities on the stock exchanges corroborate the valuation
taken by the investors for the purpose of assessment under Income Tax Act, Wealth
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Tax Act etc.
5. Since securities are quoted, there is no secrecy of the price realization of securities
]
INTERMEDIARIES IN PRIMARY MARKET
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1. MERCHANT BANKERS: -
Merchant bankers carry out the work of underwriting and portfolio management,
issue management etc. They are required to get separate registration with SEBI as
portfolio managers. Underwriting can be done without any additional registration. Only
body corporate with a net worth of Rs.5 crores are allowed to work as category I
merchant bankers. They have to carry out the work relating to new issue such as
determination of security mix to be issued, drafting of prospectus, application forms,
allotment letters, appointment of registrars for handling share applications and transfer,
making arrangement for underwriting placement of shares, appointment of brokers and
bankers to issue, making publicity of the issue. They are also known as lead managers to
an issue.
Category II merchant bankers can act as consultants, advisers, portfolio managersand co-managers. Category III merchant bankers can act as underwriters, advisors and
consultants and category IV merchant bankers can act only as advisers or consultants to a
public issue. Merchant bankers have to fulfill the prescribed minimum capital adequacy
norms in terms of net worth and they should have adequate and necessary infrastructure.
They should also employ experts having professional qualifications.
2. UNDERWRITERS: -
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The issuing company has to appoint underwriters in consultation with the
merchant bankers or lead manager. The underwriters play an important role in the
development of the primary market. The underwriters are the institutions or agencies,
which provide a commitment to take up the issue of securities in case the company fails
to get full subscription from the public. They get commission for their services. The
underwriting services are provided by the brokers, investment companies commercial
banks and term lending institutions.
3. BANKERS TO THE ISSUE: -
The bankers play an important role in the working of the primary market. They
collect applications for shares and debentures along with application money from
investors in respect of issue of securities. They also refund the application money to the
applicants to whom securities could not be allotted on behalf of the issuing company. A
company is not authorized to collect the application money. The Companies Act, 1956,
provides that the money on account of issue of shares and debentures should be collected
through the banks. Therefore, an issuing company has to appoint bankers to collect
money on behalf of the company.
4. REGISTRARS AND SHARES TRANSFER AGENTS: -
Registrar is an intermediary which carries out functions such as keeping a proper
record of applications and money received from investors, assisting the companies in
determining the basis of allotment of securities as per stock exchange guidelines and in
consultation with stock exchanges assist in the finalization of allotment of securities and
processing and dispatching of allotment letters, refund orders, share certificates and other
documents related to the capital issues. Share Transfer Agents are also intermediaries
who carry out functions of maintaining records of holders of securities of the company
for and on behalf of the company and handling all matters related to transfer and
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redemption of securities of the company. They also function as Depository Participants.
Registrar and share transfer agents are of two categories. Category I carry out the
activities of both registrars to an issue and of share transfer agents. Category II carries out
the activity fielder of a registrar to an issue or as a share transfer agent.
5. BROKERS TO AN ISSUE: -
Brokers are the middlemen who provide a vital connecting link between the
prospective investors and the issuing company. They assist in the subscription of issue by
the public. However, appointment of brokers is not mandatory. Brokers get their
commission from the issuing company according to the provisions of the Companies Act
and rules and regulations. There is an agreement between the brokers and the issuing
company. The maximum brokerage rate is 1.5 per cent of the capital raised in case of
public issue and 0.5 per cent in case of private placement. The brokerage covers the cost
of mailing, canvassing and all other expenses relating to the subscription of the issue.
The brokers should have an expert knowledge, professional competence and
integrity in order to carry out the overall functions of an issue. They have to obtain
consent from the stock exchange to act as a broker to the issuing company. The names
and addresses of the brokers to the issue are disclosed in the prospects by the company
help the investors to make a choice of the company for making their investments.
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SECONDARY MARKET
A market, which deals in securities that have been
already issued by companies, is called as secondary
market. It is also known as stock market. It is the base
upon which the primary market is depending. For the
efficient growth of the primary market a sound secondary
market is an essential requirement. The secondary market
offers an important facility of transfer of securities activities of securities. Secondary
market essentially comprises of stock exchanges, which provide platform for purchase
and sale of securities by investors. In India, apart from the Regional Stock Exchanges
established in different centers, there are exchanges like the National Stock Exchange
(NSE), who provide nation wide trading facilities with terminals all over the country. The
trading platform of stock exchanges is accessible only through brokers and trading of
securities is confined only to stock exchanges.
The activities of buying and selling of securities in a market are carried out through the
mechanism of stock exchange. There are at present 24 Stock Exchanges in India,
recognized by the government. The first organized stock exchange was established in
India at Bombay in 1887. When the Securities Contracts (Regulation) Act was passed in
1956, only 7 stock exchanges were recognized. There are three important stock
exchanges in Bombay namely the Bombay Stock Exchange, National Stock Exchange
and over the Counter Exchange of India. There has been a substantial growth of capital
market in India during the last 25 years.Corporate Securities - There are 23 exchanges in the country, which offer screen based
trading system. The trading system is connected using the VSAT technology from over
357 cities. There were 9,368 trading members registered with SEBI as at end March 2004
The market capitalization has grown over the period indicating more companies using the
trading platform of the stock exchange. The all India market capitalization is estimated at
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Rs. 13,187,953 million at the end of March 2004. The market capitalization ratio defined
as the value of listed stocks divided by GDP is used as a measure of stock market size. It
is of economic significance since market is positively correlated with the ability to
mobilize capital and diversify risk. It increased sharply to 52.3% in 2003-04 against
28.5% in the previous year. The trading volumes on exchanges have been witnessing
phenomenal growth over the past decade. The trading volume, which peaked at Rs.
28,809,900 million in 2000-01, fell substantially to Rs. 9,689,093 million in 2002-03.
However, the year 2003-04 saw a turnaround in the total trading volumes on the
exchanges. It registered a volume of Rs. 16,204,977 million. The turnover ratio, which
reflects the volume of trading in relation to the size of the market, has been increasing by
leaps and bounds after the advent of screen based trading system by the NSE. The
turnover ratio for the year 2003-04 accounted at 122.9%. The relative importance of
various stock exchanges in the market has undergone dramatic change during this decade.
The increase in turnover took place mostly at the big exchanges. The NSE yet again
registered as the market leader with more 85% of total turnover (volumes on all
segments) in 2003-04. Top 5 stock exchanges accounted for 99.88% of turnover, while
the rest 18 exchange for less than 0.12% during 2003-04 (Table 1-11). About ten
exchanges reported nil trading volume during the year.
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The movement of the S&P CNX Nifty, the most widely used indicator of the market, is
presented in Chart 1-1. The index movement has been responding to changes in the
governments economic policies, the increase in FIIs inflows, etc. However, the year
2003-04 witnessed a favorable movement in the Nifty, wherein it registered its all time
high in January 2004 of 2014.65. The point-to-point return of Nifty was 80.14% for
2003-04.
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Government Securities - The trading in government securities exceeded the combined
trading in equity segments of all the exchanges in the country during 2003-04. The
aggregate trading in central and state government dated securities, including treasury
bills, increased by manifold over a period of time. During 2003-04 it reached a level of
Rs. 26,792,090 million. The share of WDM segment of NSE in total turnover for
government securities decreased marginally from 52% in 2002-03 to 47.6% in 2003-04.
However, the share of WDM segment of NSE in the total of Non-repo government
securities increased marginally from 74.01% in 2002-03 to 74.89% in 2003-04 (Table 1-
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REASONS FOR TRANSITING IN SECONDARY
MARKET
There are two main reasons why individuals transact in the secondary market:
1. INFORMATION MOTIVATED REASONS: -
Information motivated investors believe that they have superior information about a
particular security than other market participants. This information leads them to believe
that the security is not being correctly priced by the market. If the information is good,this suggests that the security is currently under-priced, and investors with access to such
information will want to buy the security. On the other hand, if the information is bad, the
security will be currently overpriced and such investors will want to sell their holdings of
the security.
2. LIQUIDITY MOTIVATED REASONS: -
Liquidity motivated investors, on the other hand, transact in the secondary market
because they are currently in a position of either excess or insufficient liquidity. Investors
with surplus cash holdings (e.g., as a result of an inheritance) will buy securities, where
as investors with insufficient cash (e.g., to purchase a Car) will sell securities.
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FUNCTION OF THE SECONDARY MARKET
1. To facilitate liquidity and marketability of the outstanding equity and debt
instruments.
2. To contribute to economic growth through allocation of funds to the most efficient
channel through the process of disinvestments to reinvestment.
3. To provide instant valuation of securities caused by changes in the internal
environment (that is, company-wide and industry wide factors). Such valuation
facilitates the measurement of the cost of capital and the rate of return of the
economic entities at the micro level.
4. To ensure a measure of safety and fair dealing to protect investors interest.
To induce companies to improve performance since the market price at the stock
exchanges reflects the performance and this market price is readily available to investors.
TRADING
The act of buying and selling of securities on a stock exchange is known as Stock
Exchange Trading. Jobbers and brokers are the two categories of dealers in the stock
exchange. A jobber is a dealer in securities while a broker is an agent or seller of
securities. Every year a member has to decide and declare in advance whether he
proposes to act as a jobber or a broker. A jobber gives two quotations as a dealer in
securities, lower quotation for buying and higher one for selling. The difference between
the two quotations is his remuneration. This system enables specialization in the dealings
and each jobber specializes in a certain group of securities. It also ensures smooth and
prompt execution of transactions. The double quotation of a jobber assures fair-trading in
the market. A broker is merely an agent to buy or sell on behalf of his clients. He is a
generalist. Broker